Once again this year, statistics from the World Tourism Organization reassure us on one point: France remains the world's leading tourist destination, far ahead of its European competitors and the United States. Travellers from all over the world come to our roads to admire the architectural wonders that embellish our cities, to taste the diversity of our culinary expertise, or more prosaically, to raid the stores on the beautiful avenues to display the products and brands that make up our dynamic economy. In this respect, let there be no doubt: France remains eminently attractive, thanks to all the intangible elements with which it abounds and which set it apart from other destinations.
But what's true for the tourist, is it equally true for the tax expert? Once he's rid himself of his guidebook and camera, the taxman must face the facts: France has a paradox on its hands. It's a paradox that France trains immensely talented engineers; that it bases its success largely on intangible, distinctive and value-bearing elements; but that it doesn't pamper these elements from a tax point of view. At a time when society is going digital and intangible assets are playing a major role in growth plans, it would be a good idea to offer an attractive environment for those who wish to house their industrial property and make it grow without having to pay the taxman's price.
Is the French preferential tax regime applicable to patent assignments and concessions outdated?
Our preferential tax regime is best known by its code number, "39 terdecies", in reference to the article of the French General Tax Code that refers to it. Its name, which smacks of technocracy, reminds us that it was first introduced in 1965 and has undergone only minor modifications since then.
Under this system, transfers or concessions of patents, patentable inventions, manufacturing processes ancillary thereto and plant breeders' certificates are taxed not at the standard rate, but at the rate applicable to long-term capital gains, i.e. 15% for companies subject to corporation tax, or 12.8% for others.
Let's be frank: in our view, the 39 terdecies mechanism suffers from two major pitfalls. First, its rate. Even when reduced, the current 15% rate applied to companies subject to corporation tax remains high, particularly when compared with those adopted by several of our European partners. With their "knowledge development box", the Irish offer a rate of 6.25%. The Dutch have done even better with their "Innovation box regime", breaking the codes and taxing income from the exploitation of patents and other inventions at 5%. Luxembourg has opted for an abatement approach, taxing a mere 20% of income. The UK has set the bar at 10%. Another way of looking at it is to compare the reduced rate of 15% with the standard rate, which is set to rise to 25% by 2022 for all companies subject to corporation tax. When our rate was still 33.33%, the time lag could give the illusion of a truly attractive rate. Now, the 15% rate means that companies lose "only" 10 points, whereas the countries mentioned above have opted for deeper cuts.
The other stumbling block is the scope of the preferential regime. It currently covers only patents and similar inventions. Admittedly, administrative doctrine and the tax judge have intervened on numerous occasions to extend the list of rights concerned and bend the initial text a little. But the regime is confined to inventions, even in the broadest sense of the term. For the time being, software is not covered, although it benefits from certain more favorable amortization mechanisms, but its exploitation is not particularly favored from a tax point of view. Trademarks, methods and processes (especially biological ones) also escape the French preferential regime (2).
For these reasons, we feel it is necessary to revise our preferential treatment system to bring it fully into line with the global economy of the 21st century. The OECD provides us with a unique opportunity to do so, by laying the foundations over the past few years for a model towards which all preferential treatment schemes should henceforth strive.
The OECD has kicked the tax can down the road
Driven by the twin objectives of consistency and substance, the OECD has laid the foundations for a common-sense approach. In Action 5 of its BEPS program (3), the Organization suggests linking the benefit of preferential regimes offered by countries to the performance of "substantial activities". Without having a clear definition of these activities, it would appear that they include research work leading to an invention. In so doing, the OECD seeks to exclude empty shells whose only merit is to legally hold assets without ever having contributed to their development. Favored tax regimes therefore appear to be the counterpart of real activities, having mobilized concrete human, material and financial resources.
This concept is described as the "nexus approach". Without being chauvinistic, we prefer it to the Anglo-Saxon " nexus" approach, which sounds more like a mystical incantation. According to this approach, the OECD explains: "we examine whether the IP regime makes its benefits dependent on the importance of the research and development activities of the taxpayers who benefit from it. It is inspired by the basic principle that governs R&D credits and similar inbound tax regimes that apply to expenses incurred in the creation of IP. [...] The nexus approach extends this principle to apply on exit to tax regimes that apply to income earned after the IP has been created and exploited" (4).
It is interesting to note that the linkage approach is unrelated to the tax rate applied under the preferential regime. Some countries, like our European neighbors, have already modified their domestic regulations to incorporate the nexus approach, while offering very low tax rates. It is therefore essential to make it clear that the OECD's work is not aimed at eliminating tax competition, but simply at rationalizing and structuring it.
In the future, our preferential treatment system will be in line with the OECD recommendations, but could go even further.
In its work on Action 5 of the BEPS program, the OECD set out to analyze the preferential tax regimes of member countries and of the "inclusive framework", in order to detect whether they incorporated the linkage approach. Surprisingly, France has been downgraded. Not that our 39 terdecies regime really contributes to the "harmful tax practices" tracked by the Organization. But its current wording makes no reference to the said substantial activities carried out on our territory, nor does it correlate the reduced rate with the commitment to R&D expenditure.
It was therefore imperative to amend the text of Article 39 terdecies. Seized of the subject, the French National Assembly mandated Bercy's Tax Legislation Directorate, which then launched a public consultation from April 24 to May 25, 2018 on corporate tax reform. Among the subjects studied, the tax regime for intellectual property was at the top of the list.
Immediately, the "DLF" postulates. The reform that will soon see the light of day in the 2019 Finance Act will have to proportion the income benefiting from the reduced tax rate to the level of R&D expenditure carried out. The "link" approach will therefore be enshrined in French law. However, the main purpose of the consultation was to analyze the appropriateness of using the additional room for maneuver provided by the OECD.
This is where the initiative disappoints. There is no reference to a revisited reduced rate, more in line with the practices of our partners. While it is certainly utopian to imagine that our face rate will ever be low, we could have dreamt that it would show a real break with the future common law rate of 25%, if only to create the appearance of attractiveness.
However, several other avenues were being explored to maintain the scheme's efficiency and strengthen its role in supporting business innovation. The DLF puts forward three distinct options. We would have liked them to be complementary.
The first option is to extend the scope of assets eligible for the reduced rate. The new regime could apply to income from the use of software recognized and protected by the French Intellectual Property Code. Option 2 suggests incorporating the notion of notional income. At present, the preferential regime only applies in cases where the invention is transferred or made available. When the patent is simply exploited by the company that originated it, it does not benefit from any preferential treatment. To provide greater support for innovation by companies (especially SMEs), reduced taxation could then be applied to a proportion of the selling price of goods and services corresponding to the value added by the patented innovation. Finally, under Option 3, taxpayers could claim the reduced rate for capital gains on the sale of patents, even within groups.
Admittedly, these options demonstrate a clear willingness on the part of the government to revisit our preferential treatment scheme, going beyond simple refurbishments. Even so, it's hard to resist a touch of pessimism. The reforms envisaged could have gone further, drawing on the work of the OECD, feedback from the business world and feedback from neighboring countries.
At the time of writing, the Government had registered the draft law with the French National Assembly on September 24. It has to be said that, for the time being, it contains very timid advances, and confines itself to transposing the link approach, in addition to extending the regime to software (Option 1 above). This bill, as its name suggests, may still undergo major changes before its final version. So let's try to remain positive. We'll know in the next few months whether France is destined to remain a tourist destination, or whether it is on the way to becoming a tax haven as well.
(article published in Les Nouvelles Fiscales Lamy, n°1233, December 1, 2018 1 )
(1) Courtesy of Ms. Sabine Dubost, Head of the Tax and Corporate Law collection.
(2) Bofip n° BOI-BIC-PVMV-20-20-20-20140414, updated April 14, 2014.
(3) Fighting harmful tax practices more effectively, taking into account transparency and substance, final report published in October 2015.
(4) OECD, Final Report on Action 5, 2015, §28, page 28.
